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Accounting 1, Chapter 14 > Chapter 14 > Flashcards

Chapter 14 Flashcards

1
Q

Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

A

True

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2
Q

Financial statement analysis lessens the need for expert judgment.

A

False

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3
Q

Financial statement analysis may be used for personal investment decisions.

A

True

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4
Q

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

A

True

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5
Q

External users of accounting information make the strategic and operating decisions of a company.

A

False

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6
Q

One purpose of financial statement analysis for internal users is to provide information helpful in improving the company’s efficiency and effectiveness in providing products and services.

A

True

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7
Q

Evaluation of company performance does not include analysis of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

A

False

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8
Q

A company’s board of directors analyzes financial statements to assess future company prospects for making operating decisions.

A

False

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9
Q

Financial analysis only refers to the communication of relevant financial information to decision makers.

A

False

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10
Q

Profitability is the ability to generate future revenues and meet long-term obligations.

A

False

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11
Q

Liquidity and efficiency are considered to be building blocks of financial statement analysis.

A

True

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12
Q

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

A

False

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13
Q

Profitability is the ability to generate positive market expectations.

A

False

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14
Q

Financial reporting includes not only general purpose financial statements, but also information from stock exchange filings, press releases, shareholders’ meetings, forecasts, management letters, auditor’s reports, and Webcasts.

A

True

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15
Q

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

A

False

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16
Q

General-purpose financial statements include the (1) statement of comprehensive income (income statement), (2) statement of financial position (balance sheet), (3) statement of changes in equity, (4) statement of cash flows, and (5) notes to these statements.

A

True

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17
Q

Standards for comparison are necessary when making judgments about a company’s performance.

A

True

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18
Q

Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

A

True

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19
Q

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

A

True

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20
Q

Intracompany analysis is based on comparisons with competitors.

A

False

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21
Q

General standards of comparisons include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

A

True

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22
Q

Vertical analysis is the comparison of a company’s financial condition and performance across time.

A

False

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23
Q

Horizontal analysis is the comparison of a company’s financial condition and performance to a base amount.

A

False

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24
Q

. Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

A

True

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25
Q

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

A

True

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26
Q

A good financial report does not link interpretations and conclusions of analysis with the underlying information.

A

False

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27
Q

A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

A

True

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28
Q

Analysis of a single financial number is often of limited value.

A

True

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29
Q

Comparative financial statements are reports that show financial amounts placed side by side in columns on a single statement for analysis purposes.

A

True

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30
Q

Vertical analysis is used to reveal patterns in data covering successive periods.

A

False

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31
Q

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

A

True

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32
Q

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

A

True

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33
Q

Comparative horizontal analysis is used to reveal patterns in data covering successive periods.

A

True

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34
Q

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

A

True

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35
Q

The percent change is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

A

False

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36
Q

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

A

True

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37
Q

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

A

False

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38
Q

The base amount for a common-size statement of financial position is usually total assets.

A

True

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39
Q

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

A

False

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40
Q

Graphical analysis of the statement of financial position can be useful in assessing sources of financing.

A

True

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41
Q

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.

A

True

($14,000/$178,300) x 100 = 7.85%

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42
Q

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

A

True

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43
Q

Ratios, like other analysis tools, are only historically oriented.

A

False

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44
Q

Liquidity refers to the availability of resources to meet short-term cash requirements.

A

True

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45
Q

Working capital is computed as current liabilities minus current assets.

A

False

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46
Q

The current ratio is calculated as current liabilities divided by current assets.

A

False

47
Q

Total asset turnover reflects a company’s ability to use its assets to generate sales and is an important indication of operating efficiency.

A

True

48
Q

Capital structure refers to a company’s long-run financial viability and its ability to cover long-term obligations.

A

False

49
Q

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

A

True

50
Q

The greater the times interest earned ratio, the greater the risk a company is exposed to.

A

False

51
Q

Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.

A

True

52
Q

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

A

False

53
Q

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

A

True

54
Q

A rough guideline states that for a company with no discounts offered, days’ sales uncollected should not exceed 1 1/3 times the days in its credit period.

A

True

55
Q

A company that has days’ sales uncollected of 30 days and days’ sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

A

False

56
Q

The return on total assets can be calculated as profit margin times total asset turnover.

A

True

57
Q

The return on ordinary shareholders’ equity measures a company’s success in reaching the goal of earning net income for its owners.

A

True

58
Q

A high level of expected risk suggests a low price-earnings ratio.

A

True

59
Q

The return on total assets ratio is a profitability measure.

A

True

60
Q

A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company’s dividend yield equals 21.4%.

A

False

$0.75/$64.75 = 1.16%

61
Q

Financial statement analysis:
A. Is the application of analytical tools to general-purpose financial statements and related data for making business decisions.
B. Involves transforming accounting data into useful information for decision-making.
C. Helps users to make better decisions.
D. Helps to reduce uncertainty in decision-making.
E. All of these.

A

E

62
Q 
Evaluation of company performance can include comparison and/or assessment of: 
A. Past performance.
B. Current performance.
C. Current financial position.
D. Future performance and risk.
E. All of these.
A

E

63
Q

External users of financial information:
A. Are those individuals involved in managing and operating the company.
B. Include internal auditors and consultants.
C. Are not directly involved in operating the company.
D. Make strategic decisions for a company.
E. Make operating decisions for a company.

A

C

64
Q

Internal users of financial information:
A. Are not directly involved in operating a company.
B. Are those individuals involved in managing and operating the company.
C. Include shareholders and lenders.
D. Include directors and customers.
E. Include suppliers, regulators, and the press.

A

B

65
Q 
The building blocks of financial statement analysis include: 
A. Liquidity and efficiency.
B. Solvency.
C. Profitability.
D. Market prospects.
E. All of these.
A

E

66
Q

Financial reporting refers to:
A. The application of analytical tools to general-purpose financial statements.
B. The communication of financial information useful for decision making.
C. Financial statements only.
D. Ratio analysis.
E. Profitability.

A

B

67
Q 
The ability to meet short-term obligations and to efficiently generate revenues is called: 
A. Liquidity and efficiency.
B. Solvency.
C. Profitability.
D. Market prospects.
E. Creditworthiness.
A

A

68
Q 
The ability to generate future revenues and meet long-term obligations is referred to as: 
A. Liquidity and efficiency.
B. Solvency.
C. Profitability.
D. Market prospects.
E. Creditworthiness.
A

B

69
Q 
The ability to provide financial rewards sufficient to attract and retain financing is called: 
A. Liquidity and efficiency.
B. Solvency.
C. Profitability.
D. Market prospects.
E. Creditworthiness.
A

C

70
Q 
The ability to generate positive market expectations is called: 
A. Liquidity and efficiency.
B. Liquidity and solvency.
C. Profitability.
D. Market prospects.
E. Creditworthiness.
A

D

71
Q 
Standards for comparisons in financial statement analysis include: 
A. Intracompany standards.
B. Competitors' standards.
C. Industry standards.
D. Guidelines (rules of thumb).
E. All of these.
A

E

72
Q

Intracompany standards for financial statement analysis:
A. Are often based on a company’s prior performance.
B. Are often set by competitors.
C. Are set by the company’s industry.
D. Are based on rules of thumb.
E. Are published in Dun and Bradstreet.

A

A

73
Q

Industry standards for financial statement analysis:
A. Are based on a company’s prior performance.
B. Are set by the government.
C. Are set by the financial performance and condition of the company’s industry.
D. Are based on rules of thumb.
E. Compare a company’s income with the prior year’s income.

A

C

74
Q

Guidelines (rules-of-thumb) are developed from:
A. Industry statistics from the government.
B. Past experience.
C. Analysis of competitors.
D. Relations between financial items.
E. Dun and Bradstreet.

A

B

75
Q

Three of the most common tools of financial analysis are:
A. Financial reporting, ratio analysis, vertical analysis.
B. Ratio analysis, horizontal analysis, financial reporting.
C. Horizontal analysis, vertical analysis, ratio analysis.
D. Trend analysis, financial reporting, ratio analysis.
E. Vertical analysis, political analysis, horizontal analysis.

A

C

76
Q 
The comparison of a company's financial condition and performance across time is known as: 
A. Horizontal analysis.
B. Vertical analysis.
C. Political analysis.
D. Financial reporting.
E. Investment analysis.
A

A

77
Q 
The measurement of key relations among financial statement items is known as: 
A. Financial reporting.
B. Horizontal analysis.
C. Investment analysis.
D. Ratio analysis.
E. Risk analysis.
A

D

78
Q 
The comparison of a company's financial condition and performance to a base amount is known as: 
A. Financial reporting.
B. Horizontal ratios.
C. Investment analysis.
D. Risk analysis.
E. Vertical analysis.
A

E

79
Q 
A financial statement analysis report usually includes: 
A. An executive summary.
B. An analysis overview.
C. Evidential matter.
D. Assumptions.
E. All of these.
A

E

80
Q 
The background on a company, its industry, and its economic setting is usually included in which of the following sections of a financial statement analysis report? 
A. Executive summary.
B. Analysis overview.
C. Evidential conclusions.
D. Factor analysis.
E. Inferences.
A

B

81
Q

A financial statement analysis report:
A. Enables readers to see the process and rationale of analysis.
B. Forces preparers to organize their reasoning and to verify the logic of analysis.
C. Serves as a method of communication to users.
D. Helps users and preparers to refine conclusions based on evidence from key building blocks.
E. All of these.

A

E

82
Q 
Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents, are referred to as: 
A. Period-to-period statements.
B. Controlling statements.
C. Successive statements.
D. Comparative statements.
E. Serial statements.
A

D

83
Q 
Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents, are referred to as: 
A. Period-to-period statements.
B. Controlling statements.
C. Successive statements.
D. Comparative statements.
E. Serial statements.
A

A

84
Q 
Trend analysis is also called: 
A. Financial analysis.
B. Ratio analysis.
C. Index number trend analysis.
D. Industry analysis.
E. Output analysis.
A

C

85
Q

The dollar change for a financial statement item is calculated by:
A. Subtracting the analysis period amount from the base period amount.
B. Subtracting the base period amount from the analysis period amount.
C. Subtracting the analysis period amount from the base period amount, dividing the result by the base period amount, then multiplying that amount by 100.
D. Subtracting the base period amount from the analysis period amount, dividing the result by the base period amount, then multiplying that amount by 100.
E. Subtracting the base period amount from the analysis amount, then dividing the result by the base amount.

A

B

86
Q 
A company's sales in Year 1 were $250,000 and in Year 2 were $287,500. Using Year 1 as the base year, the sales trend percent for Year 2 is: 
A. 87%.
B. 100%.
C. 115%.
D. 15%.
E. 13%.
($287,500/$250,000) x 100 = 115%
A

C

($287,500/$250,000) x 100 = 115%

87
Q

Phoenix Company reported sales of $400,000 for Year 1, $450,000 for Year 2, and $500,000 for Year 3. Using Year 1 as the base year, what were the percentage increases for Year 2 and Year 3 compared to the base year?
A. 80% for Year 2 and 90% for Year 3.
B. 88% for Year 2 and 80% for Year 3.
C. 88% for Year 2 and 90% for Year 3.
D. 112.5% for Year 2 and 125% for Year 3.
E. 125% for Year 2 and 112.5% for Year 3.
Year 2: $450,000/400,000 x 100 = 112.5%
Year 3: $500,000/400,000 x 100 = 125%

A

D
Year 2: $450,000/400,000 x 100 = 112.5%
Year 3: $500,000/400,000 x 100 = 125%

88
Q

In horizontal analysis the percent change is computed by:
A. Subtracting the analysis period amount from the base period amount.
B. Subtracting the base period amount from the analysis period amount.
C. Subtracting the analysis period amount from the base period amount, dividing the result by the base period amount, then multiplying that amount by 100.
D. Subtracting the base period amount from the analysis period amount, dividing the result by the base period amount, then multiplying that amount by 100.
E. Subtracting the base period amount from the analysis amount, then dividing the result by the analysis period amount.

A

D

89
Q

To compute trend percents the analyst should:
A. Select a base period, assign each item in the base period statement a weight of 100%, and then express financial numbers from other periods as a percent of their base period number.
B. Subtract the analysis period number from the base period number.
C. Subtract the base period amount from the analysis period amount, divide the result by the analysis period amount, then multiply that amount by 100.
D. Compare amounts across industries using Dun and Bradstreet.
E. All of these.

A

A

90
Q 
Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount are called: 
A. Asset comparative statements.
B. Percentage comparative statements.
C. Common-size comparative statements.
D. Sales comparative statements.
E. General-purpose financial statements.
A

C

91
Q 
Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount, and in which the base amount is expressed as 100%, are called: 
A. Comparative statements.
B. Common-size comparative statements.
C. General-purpose financial statements.
D. Base line statements.
E. Index statements.
A

B

92
Q

Common-size statements:
A. Reveal changes in the relative importance of each financial statement item.
B. Do not emphasize the relative importance of each item.
C. Compare financial statements over time.
D. Show the dollar amount of change for financial statement items.
E. Reveal patterns in data across successive periods.

A

A

93
Q

The common-size percent is computed by:
A. Dividing the analysis amount by the base amount.
B. Dividing the base amount by the analysis amount.
C. Dividing the analysis amount by the base amount and multiplying the result by 100.
D. Dividing the base amount by the analysis amount and multiplying the result by 1,000.
E. Subtracting the base amount from the analysis amount and multiplying the result by 100.

A

C

94
Q 
A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals: 
A. .0785%.
B. 7.85%.
C. 12.73%.
D. 1273%.
E. 7850%.
A

B

($14,000/$178,300) x 100 = 7.85%

95
Q 
Current assets minus current liabilities is: 
A. Profit margin.
B. Financial leverage.
C. Current ratio.
D. Working capital.
E. Quick assets.
A

D

96
Q 
Current assets divided by current liabilities is the: 
A. Current ratio.
B. Quick ratio.
C. Debt ratio.
D. Liquidity ratio.
E. Solvency ratio.
A

A

97
Q 
Quick assets divided by current liabilities is the: 
A. Acid-test ratio.
B. Current ratio.
C. Working capital ratio.
D. Current liability turnover ratio.
E. Quick asset turnover ratio.
A

A

98
Q 
Net sales divided by average accounts receivable, net is the: 
A. Days' sales uncollected.
B. Average accounts receivable ratio.
C. Current ratio.
D. Profit margin.
E. Accounts receivable turnover ratio.
A

E

99
Q 
Dividing accounts receivable, net by net sales and multiplying the result by 365 is the: 
A. Profit margin.
B. Days' sales uncollected.
C. Accounts receivable turnover ratio.
D. Average accounts receivable ratio.
E. Current ratio.
A

B

100
Q 
Dividing ending inventory by cost of goods sold and multiplying the result by 365 is the: 
A. Inventory turnover ratio.
B. Profit margin.
C. Days' sales in inventory.
D. Current ratio.
E. Total asset turnover.
A

C

101
Q 
Net sales divided by average total assets is the: 
A. Profit margin.
B. Total asset turnover.
C. Current ratio.
D. Sales return ratio.
E. Return on total assets.
A

B

102
Q 
Net income divided by net sales is the: 
A. Return on total assets.
B. Profit margin.
C. Current ratio.
D. Total asset turnover.
E. Days' sales in inventory.
A

B

103
Q 
Net income divided by average total assets is: 
A. Profit margin.
B. Total asset turnover.
C. Return on total assets.
D. Days' income in assets.
E. Current ratio.
A

C

104
Q 
Annual cash dividends per share divided by market price per share is the: 
A. Price-earnings ratio.
B. Price-dividends ratio.
C. Profit margin.
D. Dividend yield ratio.
E. Earnings per share.
A

D

105
Q 
The average number of times a company's inventory is sold during an accounting period, calculated by dividing cost of goods sold by the average inventory balance, is the: 
A. Accounts receivable turnover.
B. Inventory turnover.
C. Days' sales uncollected.
D. Current ratio.
E. Price earnings ratio.
A

B

106
Q 
A component of operating efficiency and profitability, calculated by expressing net income as a percent of net sales, is the: 
A. Acid-test ratio.
B. Merchandise turnover.
C. Price earnings ratio.
D. Accounts receivable turnover.
E. Profit margin ratio.
A

E

107
Q 
One of several ratios that reflects solvency includes the: 
A. Acid-test ratio.
B. Current ratio.
C. Times interest earned ratio.
D. Total asset turnover.
E. Days' sales in inventory.
A

C

108
Q 
A company had a market price of $37.50 per share, earnings per share of $1.25, and dividends per share of $0.40. Its price-earnings ratio equals: 
A. 3.1.
B. 30.0.
C. 93.8.
D. 32.0.
E. 3.3.
A

B

$37.50/$1.25 = 30.0

109
Q 
A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals: 
A. 1.16%.
B. 2.14%.
C. 4.67%.
D. 5.41%.
E. 18.50%.
A

A

$0.75/$64.75 = 1.16%

110
Q

Selected current year company information follows:
Net income…………………. $ 15,953
Net sales………………………..712,855
Total liabilities (new year)… 83,932
Total liabilities (end year)… 103,201
Total shareholders’ equity, beginning-year.. 198,935
Total shareholders’ equity, end-of-year…… 121,851
The total asset turnover is:
A. 2.24 times
B. 2.81 times
C. 3.64 times
D. 4.67 times
E. 6.28 times

A

B
Add total liabilities and equity for the beginning and end of the year.
Total asset turnover= 712,855 (net sales)/[(282,867+255,052)/2]=2.81

111
Q

Selected current year company information follows:
Net income…………………. $ 15,953
Net sales………………………..712,855
Total liabilities (new year)… 83,932
Total liabilities (end year)… 103,201
Total shareholders’ equity, beginning-year.. 198,935
Total shareholders’ equity, end-of-year…… 121,851
The return on total assets is:
A. 2.24%
B. 2.81%
C. 3.64%
D. 4.67%
E. 6.28%

A

E
Add total liabilities and equity for the beginning and end of the year.
Total asset return= 15,953 (net income)/[(282,867+255,052)/2]=6.28

112
Q

Use the following selected information from Farris, LLC to determine the Year 2 and Year 1 trend percents for net sales using Year 1 as the base.
*REFER TO CHART ON WORD DOCUMENT

A. 36.4% for Year 2 and 41.1% for Year 1.
B. 55.0% for Year 2 and 56.0% for Year 1.
C. 119.4% for Year 2 and 100.0% for Year 1.
D. 117.2% for Year 2 and 100.0% for Year 1.
E. 65.1% for Year 2 and 64.6% for Year 1.

A

C
Year 2: $276,200/$231,400 x 100 = 119.4%
Year 1: $231,400/$231,400 x 100 = 100.0%

113
Q

Use the following selected information from Farris, LLC to determine the Year 2 and Year 1 trend percents for cost of goods sold using Year 1 as the base.
*REFER TO CHART ON WORD DOCUMENT

A. 36.4% for Year 2 and 41.1% for Year 1.
B. 55.0% for Year 2 and 56.0% for Year 1.
C. 119.4% for Year 2 and 100.0% for Year 1.
D. 117.2% for Year 2 and 100.0% for Year 1.
E. 65.1% for Year 2 and 64.6% for Year 1.

A

D
Year 2: $151,900/$129,590 x 100 = 117.2%
Year 1: $129,590/$129,590 x 100 = 100.0%

Accounting 1, Chapter 14 (1 decks)

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